OTTAWA—The global economy is being confronted with a new wave of groth-crushing credit troubles as a result of the European debt crisis, Bank of Canada governor Mark Carney warns.
In his first speech since being named by G20 leaders to the head of the international body in charge of banking reform, Carney used a keynote speech to a London business audience to stress the need for quick action to increase global liquidity.
But there was also a long game objective to Carney’s largely technical speech in one of the world’s leading financial hubs: connecting the dots on how he will use his three-year posting at the Financial Stability Board to try to end the boom and bust liquidity cycles that constantly plague the global economy.
“Global liquidity has fluctuated wildly over the past five years and we are on the cusp of another retrenchment,” he said in notes of the address released in Ottawa.
“Over the medium term, the continuation of such extreme liquidity cycles could ultimately threaten open capital markets and a free trading system if not better addressed.”
With private liquidity drying up over concerns about sovereign debt in Europe, Carney said it is again up to the public sector, in particularly central banks, to ensure there is sufficient credit available at reasonable terms for businesses and households to continue to invest and spend.
He said the recent retreat of available credit—similar to when Lehman Brothers collapsed in 2008—has already pushed Europe into what he said will be at least a brief recession.
But the impact has spread beyond Europe, with global financial markets tightening significantly and market-making activity tanking..
“The effect on the real economy will soon be felt,” he said.
Forecasts from global organizations such as the International Monetary Fund, central banks and private-sector economists have all pointed to slower global and domestic growth.
In Canada, Carney last month projected the economy would slow to less than one per cent growth in the last three months of 2011, half of the forecasted rate of the third quarter.
The long-term answer to these wild fluctuation in global liquidity is enactment of financial system reforms proposed by the G20, which the FSB will help monitor, Carney said.
The reforms, if successful, will moderate the cycles and smooth out global liquidity flows by making financial institutions more sound, with greater capital reserves.
“Measures that increase the resilience of financial institutions … will reduce the probability and frequency of a sudden liquidity shock,” he explained. “Measures that reduce the [cyclical nature] of the financial system will help stabilize global liquidity flows.”